1st Time Home buyer w/o a mortgage. Considering paying cash.

[Here for the ride]

Are any of these the article from newsweek?

http://www.keepmedia.com/pubs/Newsweek/2006/10/23/1905489

http://www.keepmedia.com/pubs/Newsweek/2005/01/17/702204

[Raybyrnes]

I stand corrected. The article comes from Businessweek Feb 5 2007 entitiled Pay Off the House? Not SO Fast Pg 96 Goes through many of the simulated calculations you are considering.

[Here for the ride]

Pay Off The House? Not So Fast

It may be smarter to invest the extra money instead of eliminating your mortgage

If you ask yourself whether you should pay off the mortgage before you retire, your first impulse may be to say: “Why not?” Many people have an instinctive desire to own the house free and clear before they stop working, figuring the absence of a monthly mortgage payment will help relieve the pressure of living on a reduced income.

But prepaying your mortgage may not be the savviest move, particularly from a tax standpoint. This is especially true when faced with the choice between fully funding a tax-deferred 401(k) or adding to your mortgage payment each month. It even applies when the alternative is to invest more in a taxable account.

The reasons to channel the money into retirement savings are clear. Every dollar you sock away in a 401(k), individual retirement account, or other tax-deferred plan saves taxes now and lets your money grow tax-free over the long term. Taxes come due only when you withdraw, usually when your income and tax rate are lower.

TAX SAVINGS
Take the case of a 50-year-old couple in the 33% marginal tax bracket who want to retire in 10 years. They have $400,000 left on their 30-year, 6% mortgage, and each is eligible to contribute $20,500 a year to their 401(k)s. Karen Folk, a financial planner in Urbana, Ill., calculated the impact of putting $41,000 a year into their 401(k)s vs. diverting it to pay the mortgage.

In the first scenario, the couple maxes out the 401(k)s. After 10 years, even earning a modest 6% return, the two accounts would accumulate $559,922. With an 8% return, the accounts would gain about $625,066. That’s more than enough, even after taxes, to pay off the remaining mortgage debt of about $175,000. In addition, the couple would have saved nearly $200,000 in taxes–$59,000 from the mortgage interest deduction and a deferred amount of more than $135,000 because of the 401(k) contributions.

Alternatively, if they put the entire $20,500 each into prepayments, the mortgage would be paid off in less than six years, leaving them just four years to pay the full $41,000 into their 401(k). Under this scenario, they end up with a paid-off mortgage and $385,000, if the 401(k) return is 6%; $402,000, if the return is 8%. Tax savings from the mortgage interest deduction and the deferred 401(k) contributions come to about $81,000, less than half that saved by putting all the money into 401(k)s.

Even if you’re already maxing out retirement account contributions, investing extra money in a taxable account may be smarter. After JPaul Dixon, 38, a vice-president at insurance broker Hylant Group in Ann Arbor, Mich., made a $110,000 profit on the sale of his home, he thought he could put more money into a new $435,000 house and therefore pay it off sooner. But his adviser showed Dixon that he’d benefit more by putting only 20% down and investing the $110,000. At an annual return of 8% over 20 years, Dixon would end up with $512,705, more than enough to pay off the balance on the $348,000 mortgage he just took on.

You should also keep the mortgage if a big chunk of your payment is tax- deductible interest. Frank Moore, Dixon’s financial planner, says the aftertax cost of a 6% mortgage is about 4% for taxpayers in the 33% bracket. If you can earn more than 4% after tax, you’re better off not prepaying the mortgage.

Of course, if you don’t think you’ll have the discipline to invest the money, or if you’re close to the end of the mortgage anyway and the tax benefits have dwindled, you just might pay it off. And don’t discount the emotional aspect of your decision, says J. Steven Cowen, a financial planner in La Jolla, Calif. Knowing that his own business could face a downturn at any time, Cowen and his wife decided to kick in an additional $1,000 a month to mortgage payments. Their desire to stay in their house for the rest of their lives was reason enough.

[Here for the ride]

You guys have given more than a couple of things to consider, and I feel a little bad pulling more data w/o going over the advice I recieved on the forum over the weekend. Give me a week and I’ll consider each sinario I’ve already been given.

Here’s the thing. The article caught my interest. I think the #’s are wrong, but I’m not so hot with a mortgage calculator to be totally certain.

Buisnessweek calculates the intrest “earned” over the years if they were to invest it in the stock market, but I didn’t see where they calculated the cost of mortgage, or the “loss” in the first senario. Right off the bat, if it cost me 6% in mortgage intrest, I would HAVE to make 6% in the market to be a wash? Add the tax break for the mortgage intrest, and subtract the same amount I would pay in additional income from the investment and I’m still at a wash, maybe 3/4 of a % in the black? Now my head hurts? That’s a whole lot of stuff to accomplish for a .75% spread? What about the points up front to generate the mortgage and the small fee I pay to vanguard to hold my 401k? No fee’s were calculated?

Who’s good with a mortgage calculator and wants to proof the Article?

[(former)FormerSanDiegan]

There’s another factor: although you may not pay a penalty for first-time buyer withdrawals from certain retirement accounts, you do pay taxes. If you have a good income this is 30% or more off the bat. Figure out how long you have to save/invest or what return you need to make back that 30%.
Assuming 6% interest, it takes over 6 years just to get back to even, assuming you pay 30% in taxes. In many cases it’s much worse (e.g. CA state marginal tax rate at 9.3%)

My guess is that tilts the spread much more than the 0.75% you figured.

My advice: Do not raid your retirement funds to pay down a house, unless it is in a year that you have little or no income so that you can minimize the taxes. When you buy, pay your house down as an ongoing living expense, just like you do with your rent today.

If you want to hedge your bets, raid your retirement for an amount that makes your mortgage roughly equal to rent after taxes. At the bottom this will likely be 20% down (as opposed to 50% today).

[Here for the ride]

Well after all of the contimplation, I got the word back from my CPA. The IRA can be raided (if that word works) for a grand total of $10K with out a penalty. There are alot of exclusion with regaurds to the IRA that can get you out of the 12.5% penalty. The 401k can’t be touched. All penalties apply to the 401k regaurdless of the sob story. Though I can borrow from the 401k, it wouldn’t make sence borrowing from myself when I can barrow somebody elses $ in the form of a mortgage.

If some one really wanted to, they could fold the 401k into an IRA (depending on your employers rules) and then raid the IRA for the wopping $10k. Bottom line it wouldn’t work like I had hoped for me or 90% of the population.

With reguard to the post above. I figure my tax bracket will be 30%+ at 60yrs of age (depending on how well the politicians learn to rape us in 30yrs), just like it is at 29yrs of age. The bonus would be the fact that my $200-$300k that I had in 2008 would be wrapped up into an asset that wasn’t lost in the 2009 recession (obviously I don’t know the dates but the point is valid). I’m thinking home prices will lead the loss, followed by the stock market. Essentially selling high (stock/401k), to buy low (home). I’m a bit worried about loosing my investment like I did in the tech bust.

[Raybyrnes]

I would be careful with your words with respect to raping you. You might consider the fact that it is the same system that is providing the opportunities that you have. Go live in a country like Brzil and Ruissia and then start complaining about taxes. Unitl then thank you lucky stars that you re able to make what you make and pay what you pay in taxes.

I’ll make a bet that I pay as much as any person on this board in taxes and while it might be distasteful I tend to go to sleep at night thanking God for providing well for me and my family. I tend to find it distasteful to use words like rape when it comes to paying your fair share.

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